Opportunity Cost

Opportunity Cost – Opportunity cost is an important term in Microeconomics wherein a company has several choices for possible investments. The company has to evaluate and compare the benefits which can be derived from Choice X to that of Choice Y.

If we assume that the best choice has been made, opportunity cost would basically be the cost incurred by foregoing a particular option that would have been the second best choice. This cost plays a pivotal role in making sure that the resource which are scarce are used most efficiently. Further, opportunity costs are not limited to monetary value.

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It may be the real price of the foregone option, the time lost in decision making, or any other benefit associated from the foregone choice. Basically, opportunity cost is not necessarily a tangible cost. It is the value of the second best option. For instance, land purchased by a company to build a mall incurs the opportunity cost of not making a sports centre on same land.